Coming up Roses

Brit Ryle

Posted February 3, 2023

As of yesterday, pretty much everything we’ve been talking about over the last month blossomed. 

We were looking for the S&P 500 to take a run at 4100. It did even better, closing yesterday at 4179. 

We were looking for Amazon (NASDAQ: AMZN) to make a convincing move above $100 that would carry it up to $110. Amazon finished yesterday at $112.91. 

When it was trading down around $16-$17, we noted that EV truck maker Rivian (NASDAQ: RIVN) could jump to $20 a share “…in the blink of an eye.” That stock finished yesterday at $20.88, after hitting an intra-day high at $23.47. 

It took longer than expected, but Jumia (NASDAQ: JMIA) finally busted that move to $5 a share, closing at $4.90 after touching $5.09 during the session. 

And Meta (NASDAQ: META), holy moly. $150 a share might’ve seemed like an aggressive target for the stock…but a surprise earnings report that featured the promise of a $40 billion share buyback plan catapulted the stock $35 higher to finish the day at $188.77. 

Finally, there was the expectation that investors would interpret slowing inflation readings and a signal from the Fed that it was near the end of its rate hike cycle as a bullish signal. So a big thank you to everyone that did their part to make that — you guys are the best, really…

Pro tip: The Nasdaq jumped 384 points yesterday and 316 points on Wednesday, with all of Wednesday’s move coming after the Fed announced a quarter point hike at 2 pm. The reason the tech-heavy Nasdaq was so much stronger than the S&P 500 is because of tech stocks. Tech stocks are considered to be much more sensitive to interest rates than “regular” stocks. And so the perception that the Fed is about to pause rate hikes – a notion that Fed Chair Powell encouraged in his Wednesday press conference – benefits tech stocks the most.

But now that all the seeds we planted over the last month came up roses, what do we do for an encore?

Windows of Opportunity

As a general observation, it is important to understand that the market moves in what I call windows of opportunity. It’s not so much the actual news that moves stock prices, but investors’ expectations of what the news will actually be…

Bad stories tend to get worse. Bouts of selling get confirmed by increasingly negative newsflow that creates a window of opportunity to take prices lower. But there usually comes a point where the negative newsflow reaches a crescendo and investors start to tune it out. 

We noticed this exact phenomena in the early days of January, when a downgrade for Microsoft (NASDAQ: MSFT) and negative demand news for Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) failed to take the stocks lower. 

When you see stock prices stop reacting to bad news, that’s a sign that a window of opportunity may be opening for an upside move. And we should note that investors guessed right when they anticipated that the tone of the newsflow was shifting. Incrementally better economic news about inflation and wage growth helped keep the January rally rolling. 

But in the same way that the negative newflow will reach a crescendo as stock prices turn higher, good news will hit a crescendo right before a turn.

Investors have been downright giddy the last few days. Stock prices have ramped like it is the best of times. I suspect it may be time to be on the lookout for a window of opportunity for a downside move. 

Fed Chair Powell: Can I Get a Do Over?

If you simply look at the headlines, last night’s earnings reports from Apple, Amazon and Google parent company Alphabet (NASDAQ: GOOG) were bad. And it’s true that for the most part, all three missed analysts’ expectations that had already been lowered to account for the weakened demand we talked about earlier. 

Still, it could be argued that there wasn’t anything particularly new in the results. In fact, Apple suggested that its business had already started to strengthen during the current quarter. And not coincidentally, the stock reversed an early loss today. 

As for Amazon and Google, even though their stock prices were lower in the early going today, investors only took back a fraction of the gains those stocks posted on Thursday. It sure looks like investors want to put a positive spin on things…

But I can’t help but wonder how Fed Chair Powell feels about the positive spin he put on rate hikes and weakening inflation data after this morning’s Nonfarm Payroll report came in. Because it was the exact opposite of what was expected and what the Fed wants to see.

Expectations were that the U.S. economy added 188,000 jobs in January, and that the unemployment rate would tick higher, from 3.5% to 3.6%. Fewer new jobs and a little move higher for unemployment would support the Fed’s hope that inflation is weakening. 

But the Payrolls report showed 517,000 people got jobs in January and the unemployment rate fell to 3.4%. 

Now I’m not going to tell you that I think a bunch of people getting jobs is bad news. I’m glad people find work, and I also take a little delight in the strong economy that is a thumb in the Fed’s eye for its colossal blunder when it didn’t act as inflation jumped over its 2% threshold almost 2 years ago. 

But the sad truth is: the only tool the Fed has to fight inflation is interest rates. And the only purpose of raising interest rates is to lower consumer demand by getting people fired from their jobs. 

I’m sure the incredible strength of the jobs market is making Powell wish he had talked a little tougher in his post-rate hike press conference on Wednesday. He probably wishes he had hiked rates by 50 basis points instead of 25. 

The question now is: will investors start to worry that the Fed needs to get much tougher on inflation to bring it under control?

I’m not acting on that…yet. I haven’t bought any put options for a downside move. But a window of opportunity for a downside move has now opened. Let’s see if investors wanna jump through it…

That’s it for me today. Take care, enjoy your weekend and I’ll talk to you on Monday.

Briton L. Ryle
Chief Editor and Strategist
Pro Trader Today